Page Industries Ltd

GST - Applicant is engaged in manufacture, distribution and marketing of Knitted and Woven Garments under the brand name of "Jockey", Swim-wears and Swimming Equipment's under the brand name of "SPEEDO" - The applicant also gets the said garments manufactured from their job workers - Applicant had sought advance ruling on the following -   " Whether in the facts and circumstances of the case, the promotional products / Materials and Marketing Items used by the Applicant in promoting their brand and marketing their products can be considered as "inputs" and GST paid on the same can be availed as input tax credit in terms of section 16 of the CGST Act, 2017?" - AAR had inter alia held that the ITC of GST paid on the procurement of the "distributable" products which are distributed to the distributors, franchisees is allowed as the said distribution amounts to "supply" to the related parties which is exigible to GST; that the said distribution to the retailers for their use cannot be claimed as gifts to the retailers or to their customers free of cost and hence ITC of GST paid on such procurement is not allowed as per Section 17 (5) of the GST Acts; that GST paid on the procurement of "non-distributable" products qualify as "capital goods" and not as "inputs" and the applicant is eligible to claim input tax credit on their procurement, but in case they are disposed by writing off or destruction or lost, then the same needs to be reversed under Section 16 of the CGST Act, 2017 read with Rule 43 of the CGST Rules, 2017 - Aggrieved, appeal is filed before the AAAR - Appellant contends that the items such as display boards, posters, etc. sent to the franchisees and distributors have not been capitalised in their books of accounts but have been treated as revenue expenditure, hence the ruling treating such items as capital goods and not inputs is not correct; that the items such as carry bags, pens, calendars, etc which are distributed to their franchisees and distributors for giving to the customers, cannot be considered as gifts but to be treated as a form of promotional/advertising activity which is eligible for input tax credit; that the franchisees and distributors are independent entities and are not related persons as wrongly held by the lower Authority; that the franchisees and distributors have only representational rights and have the obligation to promote and market the brands of the Appellant in the specified territory but they are not related in any other way to the business of the Appellant.

Held:

++ With regard to the promotional items such as gondola racks, wall shelves and panels, POP items such as mannequins and half busts, storage units, hangers, signages, posters, display stands, etc, AAAR finds from the copies of the agreements furnished by the Appellant that there is a contractual obligation on the part of the Appellant to provide their EBO/franchisees and distributors promotional materials. The purpose of providing the EBO/franchisees and distributors with these promotional items is to enhance the sales of their products. Thus, AAAR has no hesitation in concluding that these promotional items (referred to by the lower Authority as 'non-distributable goods') are indeed used in the course or furtherance of the Appellant's business.

++ The Appellant has also urged before us that these promotional items are not capitalised in their books of accounts but are always treated as revenue expenditure and hence they cannot be considered as 'capital goods'. This is in tune with the normal accounting practices. We therefore, disagree with the finding of the lower Authority and hold that the promotional items purchased by the Appellant and provided to the EBOs/franchisees, distributors and retailers are not capital goods but 'inputs' which are used in the course or furtherance of business.

++ As regards the eligibility of input tax credit on these promotional items, the same is governed by the provisions of Chapter V (Sections 16 to 19) of the CGST Act. Section 17 restricts the entitlement of input tax credit when the goods and services or both are used for non-business purposes or exempt/non-taxable supplies.

++ As per Section 7 of the CGST Act, a transaction is termed as a supply only when it is made for a consideration. However, the transactions specified in Schedule I of the CGST Act can be treated as a "supply"even if they are made without any consideration. One such transaction mentioned in clause (b) of Schedule I is a supply of goods or services or both made between related parties or distinct persons. In this case, we find that the franchisees and distributors are independent entities and are not related to the Appellant in any of the ways mentioned in the Explanation to Section 15 of the CGST Act. Therefore, the provision of promotional materials free of charge by the Appellant to the franchisees and distributors is neither covered within the scope of a taxable supply as defined in Section 7 of the CGST Act nor is it a supply covered under the ambit of Schedule I of the said Act.

++ The activity of providing the promotional items can be termed as an 'non-taxable supply' as defined in Section 2(78) of the CGST Act.

++ Section 17(2) provides that input tax credit shall be allowed only when the goods and services or both are used for business purposes or for making a taxable supply (including zero-rated supply). When the goods or services or both are used towards making an exempt supply, then input tax credit is not allowed. As per Section 2(47) of the CGST Act, the term 'exempt supply' also includes non-taxable supply. In view of the above provisions, we hold that the GST paid on the procurement of promotional items supplied to the EBOs/franchisees and distributors free of charge will not be eligible for input tax credit since the said supply is a non-taxable supply.

++ The GST law has not specifically defined the term "gift". Hence one must turn to the definition provided under Section 2(xii) of the Gift Tax Act which defines gift as the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money's worth. Thus, it can be said that in this case, these give away promotional items which are distributed at the sole discretion of the Appellant without any contractual obligation or consideration, acquires the character of gifts. The goods procured on payment of GST which are disposed of by way of gifts are barred from being eligible for input tax credit in terms of Section 17(5)(h), even if they are used in the course or furtherance of business. Therefore, we hold that input tax credit is not eligible on the promotional items distributed as give away items on the grounds that the same is blocked by virtue of the provisions of Section 17(2) and Section 17(5)(h) of the CGST Act.

++ Members of the Maharashtra Appellate Authority differed in their decision [dated 22nd October 2019 given by the Maharashtra Appellate Authority for Advance Ruling in the case of Sanofi India Ltd] on the points in appeal and hence, in terms of Section 101(3) of the CGST Act, it was deemed that no advance ruling can be issued in respect of the question under appeal.

Conclusion:

+ Ruling No. KAR ADRG 54/2020 dated 15/12/2020 = 2020-TIOL-300-AAR-GST passed by the Advance Ruling Authority is set aside.

+ Held:

"The Promotional Products/Materials & Marketing items used by the Appellant in promoting their brand & marketing their products can be considered as "inputs" as defined in Section 2(59) of the CGST Act, 2017. However, the GST paid on the same cannot be availed as input tax credit in view of the provisions of Section 17(2) and Section 17(5)(h) of the CGST Act, 2017."

- Appeal disposed of : AAAR